Pinnacle maintains profitability, but net earnings ease in 2Q2010

Pinnacle profits declined in 2Q2010 to USD5.8 million from USD5.9 million in 2Q2009. Consolidated operating income came in at USD19.8 million in the second quarter, declining USD3.9 million from a year ago.

The company cited higher insurance premiums, part of a recently resolved dispute with Delta which did not reimburse USD1.7 million, the last time such premiums will go unreimbursed.

However, Pinnacle also cited higher reimbursable costs for the net increase in consolidated operating revenue which, during the second quarter, came in at USD218.7 million, an increase of USD7.5 million or 4%, over the same period in 2009.

Speaking of the company’s recent acquisition of Mesaba from Delta, CEO Phil Trenary said the addition of Mesaba “puts us in a better pos than any other carrier to compete for new business given the 500 regional jet contracts set to expire between 2011 and 2016. A lot of those will be converted to larger regional jet and turboprop aircraft. A lot depends on what happens to scope with the major carriers but this puts us far more in control of our future.”

He also suggested that third quarter revenues will be boosted between USD65 million-70 million with Mesaba but the gain would be offset by additional costs associated with the acquisition. It has yet to complete its review of how Mesaba will affect the bottom line given its different capacity purchase agreement with Delta. There would be little change in the combined network, said Trenary, adding that the route networks were complementary.

Second quarter 2010 pre-tax income was also reduced by a $1.5 million adjustment to the fair value of interest rate options that the company purchased to hedge interest rates in connection with the Q400 growth program. CFO Peter Hunt explained that although it lost money on the interest rate insurance, it was more than offset by the below 5% interest rate achieved for the next tranche of Bombardier Q400s that begin delivery this week. For the six months ended 30-June-2010, the company reported net income of $7.6 million.

Second quarter shows tick-up in utilisation

During the second quarter of 2010, Pinnacle Airlines completed 108,371 block hours and 70,483 departures, increases of 2% and 2%, respectively, over the same period in 2009. Pinnacle's average utilisation of its operating fleet increased by 1%. Meanwhile, Colgan Air completed 32,795 block hours and 26,783 departures during the second quarter, decreases of 4% and 3%, respectively, over the same period in 2009. Colgan operated four fewer Saab 340 aircraft within its pro-rate network during the majority of the second quarter resulting from the expected Delta/US Airways slot swap. However, with its failure, three of these aircraft were rescheduled back into service during June 2010.

“This was the first time in a long time we’ve seen utilisation tick-up,” said CFO Peter Hunt. “That is another indication of the strengthening demand in the entire airline industry. Both Pinnacle and Colgan increased revenue with Pinnacle up 4% and Colgan up USD58 million or 2%, despite lower capacity which means our pro-rate markets are showing strength. Pinnacle’s margin was 9% on operating income of USD26.8 million so trends there are very favorable going into the second half of the year. Despite the drop in revenue, however, it experienced strong RASM which was up 10% on higher loads rather than higher yields. We expect the same in the third quarter.” Hunt cautioned that, with the advent of more Q400s, the company is facing higher costs associated with crews, training and operations.

Pinnacle reported second quarter 2010 operating income and an operating margin of USD16.8 million and 10.5%, a decrease of $0.2 million and 0.5 points, respectively, from the second quarter of 2009. Operating income decreased on the insurance costs which were offset by higher revenue from an annual increase in rates under Pinnacle's operating agreements, and by slightly improved aircraft utilisation. During the first quarter of 2010, Pinnacle recorded an estimate of operating performance penalties under its CRJ-200 agreement with Delta for the first six months of 2010. Pinnacle's operating performance improved during the second quarter of 2010, resulting in a USD0.5 million reduction of the estimate for penalties under the CRJ-200 agreement.

Colgan reported operating income and an operating margin of USD3.0 million and 5.1%, declining USD2.2 million and 4.0 points, respectively, from the second quarter of 2009. Fuel costs associated with Colgan's pro-rate operations increased by USD1.5 million year-over year. Fuel cost per gallon during the first quarter 2010 was USD2.66, up 40% from USD1.90 per gallon during the same period in 2009. In addition, Colgan experienced an increase in salaries, wages and benefits of USD1.2 million from lower productivity, higher health care and other benefits costs, and crew training costs for the additional Q400 aircraft to be delivered this year. These cost increases were partially offset by USD1.2 million of additional revenue, from both a small increase under Colgan's operating agreement with Continental Airlines, and a 10% increase in revenue-per-available-seat-mile in Colgan's pro-rate markets.

Net non-operating expense of USD10.0 million for the three months ended June 30, 2010 decreased by approximately USD2.5 million versus the year-ago period owing to reduced net interest expense from the net repayment of approximately USD230 million of the company's debt obligations since 1-July-2009.

Cash flow from operating activities declines

Pinnacle ended the quarter with USD79.0 million in unrestricted cash and cash equivalents, after generating USD3.9 million in cash from operating activities during the second quarter of 2010. Cash flow from operating activities declined on a prepayment of approximately USD10.0 million of aircraft lease payments on 30-June. In addition, the company paid USD2.0 million to purchase interest rate and fuel options during the second quarter of 2010.

Net cash used in investing activities for the three months was USD5.2 million, primarily for pre-delivery payments for future Q400 aircraft deliveries and other routine capital expenditures. Net cash used in financing activities totaled USD11.8 million, primarily for scheduled principal payments on long-term debt obligations.

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